Small business owners have more financing options available to them than ever before, including invoice factoring. Whether you’re looking for an invoice factoring solution that works well with QuickBooks Online or you need to know how to record an invoice in the accounting software, this post will give you a complete overview of QuickBooks invoice factoring. To establish context, let’s go over a quick explanation of invoice factoring.
Why Businesses Use Invoice Factoring
Factoring accounts receivables is commonly used by companies who want to improve their cash flow and need quick access to cash. Oftentimes, B2B companies have large customers who require payment terms of 30, 60, or even 90 days or more. This puts them in a cash flow crunch if they need to make payroll, pay suppliers, or finance a big project in a short period of time. If the business owner has unpaid invoices, a factoring company (like FundThrough) will give them cash for the outstanding invoice, less a fee, way ahead of the payment terms. Then the factoring company will wait for the customer payment, collecting the outstanding balance in line with the original payment terms. If you want a more thorough explanation of factoring receivables, see our post, “What Is Invoice Factoring?”
[Note: FundThrough is seamlessly integrated with QuickBooks so you can pull invoices you want to fund into our platform from your QuickBooks Online account. Get started here.]
Pros and Cons of QuickBooks Invoice Financing
If you’re considering factoring company invoices, it makes sense to compare the pros and cons of factoring services in the context of using the platform.
Advantages of invoice factoring include:
- Grow your business by being able to finance large deals quickly.
- Reduced cash-flow issues from getting unpaid invoices paid.
- No debt creation because invoice factoring isn’t a loan product.
- No need to give away equity in your company to get funding.
- Less admin work since you don’t have to handle accounts receivable.
- Increased peace of mind from receiving earlier invoice payments.
- Less reliance on personal credit score.
- A factoring partner invested in your growth.
Some potential disadvantages to invoice factoring include:
- Concern about how a factoring firm will interact with your customers (Read more about how FundThrough works with your customers if you’re wondering about this.)
- Depending on the invoice factoring company, you could be looking at a high factoring fee, hidden fees, or not getting the full invoice total advanced up front.
- Some invoice factoring companies will make you sign a factor agreement requiring you to do receivable financing for all your invoices (instead of letting you choose which ones to factor).
Quickbooks Invoice Factoring Fees
The main factor fee is called the discount rate. This is the amount of money that invoice factoring companies withhold from the invoice total as their payment for advancing cash and waiting to get paid for you. You can expect to pay somewhere between 1 and 5 percent. Sometimes, however, factoring companies charge hidden fees on top of this depending on the factoring arrangement.
The invoice factoring fees you can expect vary between companies and the type of factoring transaction. In addition to the percentage a factor keeps, sometimes there are hidden fees to watch out for:
- ACH fee. This is the fee for the bank wiring funds to your account, passed on to you from the factoring firm.
- Application fee. A flat or percentage fee that’s highly variable.
- Invoice processing fee. A fee charged for getting your invoices processed in the back office.
- Closing fee. An additional amount the invoice financing company keeps from the invoice
- Monthly fee. If you sign a contract requiring that you sell a certain portion of your invoices each month and you don’t meet the minimum, you could end up paying this fee.
- Termination fee. Again, this applies if you signed a contract and want to end it early.
It’s easy to see how hidden fees can make the cost of QuickBooks invoice factoring add up over time, making it an important question to ask any factoring company you’re considering. Here’s where you can find more info about invoice factoring rates.
To give you our perspective, FundThrough’s rates are typically around 2.5 percent to 5 percent factor fee. We don’t charge any hidden fees. See our pricing page for more on what you can expect to pay for invoice funding.
Benefits of Integrating QuickBooks Online
QuickBooks Online is integrated with FundThrough. You can set up your FundThrough account by using QuickBooks so that your FundThrough dashboard is automatically populated with all your invoices. The benefits of this approach include:
- Fast account set up
- Save time without manually entering invoice data
- Start the funding process with one click
Step by Step Factoring Process in QuickBooks
Accounting for factoring receivables can be tricky. We’ve broken down the process step by step for recording QuickBooks invoice factoring in your business accounting software. We’ve also included how recording factoring fees in QuickBooks Online works.
Once you’ve received payment for the invoice from the business factoring company
1. Create an account for factored invoices
In your Chart of Account, create a liabilities account just for factored invoices. You’ll use this account for the advances from your factored invoices. You can call it something like, “loan payable – factor”.
2. Create an account for factoring fees
Follow the same steps as above to create an expense account for the factoring fees. You can call it something like, “factor fees”.
3. Create an invoice
Create an invoice just as you normally would.
4. Record a deposit
For the account, choose your liabilities account for factored invoices. Put the invoice number in the description section. In amount, put the full dollar amount of the invoice being factored.
5. Record the fee
Add a line in the same deposit. For the account, choose the expense account for factor fees. In the description amount, put the dollar amount of the invoice times the rate. (For example, if you had a $10,000 invoice factored with FundThrough, you’d record this as 10,000 X .025 since our rate is 2.5 percent for a net 30 invoice.) For the amount, enter the fee amount as a negative number. At this point, make sure the net amount matches documentation from the factoring company. Save and close.
Once the customer has paid the factoring company
6. Record the received payment
Go to Receive Payment. Put in the customer name for the outstanding invoice and the full invoice amount in the amount received. Under “Deposited to” choose “undeposited funds”. Save and close.
7. Apply payment to loan
Go to Bank Deposits. Select the deposit you just recorded. Under “Add funds to this deposit,” choose the liabilities account for factoring you created for the account section (such as “loan payable – factor”). In the amount section, record the full dollar amount of the invoice as a negative number. This will create a net zero deposit that records the loan as paid off. Save and close.